Walker Webcast: Chris Lee and KKR’s Different Investment Regime
When Chris Lee appeared on the Walker Webcast in February 2023, KKR Real Estate’s Partner and President said the firm was becoming more constructive about putting capital to work. Higher yields, improving capital flows, and increasingly attractive asset pricing were creating what Lee called a favorable risk-reward environment.
Three and a half years later, Lee told Walker & Dunlop Chairman and CEO Willy Walker that KKR still sees plenty of opportunities. But the framework has changed.
“We think about it as a regime change,” Lee said during his Sept. 30 return to the Walker Webcast.
He explained that the post-GFC environment of lower interest rates, monetary and fiscal stimulus and relatively benign globalization has given way to higher rates, inflation concerns, heavily leveraged government balance sheets, geopolitical uncertainty, and an economy increasingly shaped by artificial intelligence and digitization.
That backdrop has changed how KKR approaches both sides of its roughly $85 billion real estate portfolio, which is divided almost evenly between credit and equity.
“We’re taking a pretty balanced approach right now,” Lee said.
On the credit side, “we have bank capital, we have insurance capital, fixed and floating, and then we have more opportunistic lending capital,” Lee said. “We’re very active in all of those markets, and we’re in all those asset classes. We’re also active across the U.S. and Europe.”
He went on to say that more opportunities exist, especially as five-year loans are approaching maturity. KKR is comfortable with existing multifamily credit exposure because the firm has generally avoided high-leverage lending and focuses heavily on sponsors.
On the equity side, however, KKR is considerably more selective than it was when Lee appeared on the 2023 webcast. “When we think about our investment strategy, we are looking for demand trends that we think are attractive long term,” Lee said.
KKR starts with long-term consumer, corporate and demographic demand trends and then considers replacement cost, location and operating capabilities.
That has directed KKR toward multifamily markets, including the San Francisco Bay Area (which benefits from AI, jobs and wealth creation), Seattle (benefiting from technology and a higher GDP) and Dallas (which is enjoying strong job growth).
Senior housing has been an even larger focus, with KKR deploying more than $1 billion of equity into the sector over the past three years.
The office thesis has also evolved for KKR since 2023.
Back then, Lee said companies were reassessing real estate footprints and headcounts while focusing on margins. These days, “we haven’t bought anything on the office side,” he said. “But you have to realize it’s a bifurcated market now.”
Lee said there are also opportunities in industrial, logistics, student housing, data centers and experiential real estate. At the same time, hospitality remains more complicated because the ability to adjust room rates is accompanied by rising operating costs and substantial capital requirements.
Speaking of which, the broader capital markets are adding another layer of complexity, as higher risk-free rates are putting pressure on property values.
As a result, “this is where you really have to underwrite growth,” Lee said. Assets struggling with a lack of demand or oversupply are also under pressure.
Given the current scenario, KKR is positioning its business as a solutions provider. “If someone needs passive capital to help them finance a purchase, we have plenty of that,” he said. “We have fixed, we have floating, we can lend at a 55%-75% LTV, we can do construction.”
The discussion concluded with an outlook. While debt is questionable given higher rates, Lee said the equity side could offer interesting opportunities.
“Looking forward into the next year, there’s a lot of earnings and productivity growth,” he said. “The real question is what discount rates and multiples people are using to value the cash flow. But there are a lot of companies that are doing very well in this environment and are likely to continue to do well.”
On-demand replays of the Sept. 30 Walker Webcast are available through the Walker Webcast channels on YouTube, Spotify and Apple. Subscribe to get invites, replays and articles for new Walker Webcast episodes every week.
The post Walker Webcast: Chris Lee and KKR’s Different Investment Regime appeared first on Connect CRE.
